How to prevent the Family Trust from being tainted?

[Tauoi]

Hi

We are shortly launching into buying rental property and also at the same time are subdividing land we currently own. We are right now setting up a family trust to place the house into and are faced with being labelled "Property Developers".

Has anyone been faced with this before and how did you manage to get around it or explain it?

[Dean@Massiveaction]

Hi Tauoi,

This type of question gets asked a lot here. You need to get professional advice for your particular situation. Short answer is you need your trading entity to be at least 2 entities away from your buy and hold.
But get some professional advice!!

[Tauoi]

Thanks for that, we are seeing a Solicitor right now, but just thought I would ask how other people have dealt with the situation. Thanks

[drelly]

I'm not convinced. These discussions on structure keep coming up but it's the same old story every time. People seem to believe that form is more important than substance. A structure will not protect you if your actions are inconsistant with it's purpose.

[Dean@Massiveaction]

Hi Drelly. I agree but if you want to trade properties and buy and hold then there is nothing dodgy about setting up unrelated entities to allow that?? I get IRD to check everything I do and if they say it's OK to minimise my tax exposure in a certain way then why wouldn't one do it??

[Tauoi]

Actually nothing dodgy at all going on, have spoken to IRD and we have not set in motion anything to do with subdivision infact it is not guaranteed it will happen as we have not had an offer we are happy with, and might take it off the market.

The family trust is something I wanted set up as I want a way to separate our personal family home from the "Company" buying investment property.

We are also looking at another avenue of business and hence me wanting to draw a clear line around our Family house in the event of a left field event.

[drelly]

Hey Dean,

No, nothing dodgy at all. It's a good way to emphasise the difference between our buy and holds and our trades.

However, there's no actual protection at all. Many people seem to talk as if there's some magic structural formula to somehow avoid being "tainted" (a term I've never seen in any IRD literature). It's quite bizarre really as if somehow the IRD won't figure out that we own properties to develop as well as hold.

Fact is, that if I do develop or trade at any point, I'm tainted as an individual. No if, buts or maybes. If I'm audited, I'd be looked at in that light. That doesn't mean everything I ever sell is a "trade" but I'd have to be very careful to dot my i's and cross my t's to show why it wasn't.

That's just common sense isn't it?

[sinead]

But what about the "veil of incorporation"? You and your company are different legal entities. Just because one of your companies is trading doesn't mean that you as an individual is trading or does it? Any tax accountants out there who can clarify?

[drelly]

Hey Sinead,

The point I'm making is that as an individual, you have either traded or you have not traded. That doesn't mean that IRD will rain hellfire down upon you if you sell a property in your buy and hold entity. It just means that they will consider a sale in the context of what your overall activities are or have been. (common sense again)

It doesn't seem rational to assume that there is any protection by operating under different entities when we're either directors or beneficiaries of all our companies or trusts.

[spaceman]

As I understand if the IRD considers you an associated person you can "taint" your "buy and holds" (investing) with your trading.... this is the definition from the IRD webpage

Associated persons
Associated persons are:

companies controlled by the same persons
companies and individuals with a 25% or greater interest in the company
partnerships, partners and associates of partners
relatives by blood, marriage, or adoption to the second degree (including people in a de facto relationship)
trustees of a trust and persons who have benefited or are eligible to benefit under the trust
trustees and the settlor of a trust
trustees of two trusts that have a common settlor
two persons who are each associated with a third person.
Note: For the purpose of determining whether two companies or a company and an individual are associated, an interest held by any person in a company must be aggregated with interests held by associates of that person.

I disagree with Dean saying that

Short answer is you need your trading entity to be at least 2 entities away from your buy and hold.

Dean ....can you see anything in the above definition that proves your short answer???.......I can't

But on saying that Dean says (elsewhere) that he has been audited twice and unless he's sending posts from his prison cell he must be doing something right.

But as Drelly says it's not automatic, it depends on your intent.... how can you REALLY prove what your intent was?

If you bought a property and sold it a week later for a profit then you might have a job explaining to the IRD that it wasn't a trade. However if you had records and paperwork documenting your intent to "buy and hold" this property .... and then a better deal showed up so you sold the property and went with the new deal as a "buy and hold" and you can show the reasons for your actions. Then most likely the IRD would take this as a reasonable explanation.

If however you had done this 37 times in the space of a year then I wouldn't think all the paperwork and intent in the world would save you if you hadn't paid your tax.

I think a lot of people just haven't been audited yet (myself included) and maybe in for a nasty shock if they ever do get audited.

I personally think that the IRD are delibrately "waffley" in some of their rules. So as to cast a wide a net as possible, and to cut down on people being able to say with 100% certainty what is black and what is white ... rather than shades of grey.

Maybe I'm a bit paranoid ....... maybe the world is run by the mice as an experiment to find out the question to the meaning of life.

Good luck and be careful

cheers
Spaceman

[JohnL]

I believe you have to be very careful in this area. I went to a tax seminar given to accountants by someone from a specialist tax firm and they said 'tainting' doesn't extend past one relationship. For example, if you have a company trading, then you as a director are tainted (along with your immediate family). It doesn't mean a second company that you are a director of is also tainted.

However, I would seek advice from a specialist in structures. Every accountant and lawyer say they can do it for you, but do you go to your local GP for open heart surgery, or do you go to a specialist.

Its easy to say that you can handle being tainted personally but what happens with your children grow up and forget that they were also tainted and buy their first rental in their own name.

John

[NZGEMS]

I think the answer is simple, If you are going to trade set up a trading trust. If you plan to hold long term put in a holding trust and NEVER SELL or not for at least 10 years, but never unless you have a really good reason is probably best. I do both but so far havent sold anything out of my hold trusts.
ANd I have been audited but have set up nothing to cause alarm bells. we did have 2 houses in our own names but we sold them a couple of years ago. after owning them 10 and 13 years didnt pay tax on them apart from depreciation recovered which you would be up for anyway.

yes my kids could be tainted if they are silly enough to buy in their own names but hopefully we have educated them to realize that and the too set up trusts to buy in and again if they choose to trade they do the same as us have separate hold and trade trusts.

Happy Investing
Robyn

[drelly]

The IRD are not complete morons. If you're a director/beneficiary/trustee of a trading entity and also of a buy and hold entity, if you do something you shouldn't within your buy and hold entity, then they're not going to care about your "structure".